CBA Fined - Unsolicted Telephone Calls

Commonwealth Bank of Australia's life insurance arm has been charged with 87 counts of unlawfully offering to sell products via unsolicited telephone calls - the first criminal prosecution against a major bank following a sector-wide misconduct inquiry.

The Australian Securities and Investments Commission (ASIC)has accused Colonial Mutual Life Insurance Society Ltd, known as CommInsure, of unlawfully selling life insurance policies via unsolicited phone calls between October and December 2014.

CBA could be fined as much as A$21,250 for each charge or up to A$1.8 million, the regulator said in a statement, adding that matter was being prosecuted by the Commonwealth Director of Public Prosecutions.

CBA agreed to sell its life-insurance business to Hong-Kong based AIA Group in September 2017 but the deal has yet to be completed due to a prolonged regulatory approval process.

CBA said in a statement it was considering the matter and did not plan to comment further at this time.

CommInsure was also criticised at the inquiry into financial sector misconduct last year after it was shown to have rejected a payout to a heart attack victim because it was using outdated assessment criteria. 

6,000 Investors Kantoi RM411 Million

The High Court here has rejected for the second time an application by investors to recover their money from the company’s directors and majority shareholders from now defunct Bestino Group Bhd. In a brief decision on Friday (Oct 4), Justice Hashim Hamzah said the plaintiffs' case was rejected without cost.

Counsel Yudistra Darma Dorai, who was accompanied by R. Christopher Anand, said he would advise his clients to file for an appeal again.

He said in his view, it is a clear-cut case of where the minority shareholders have had their rights oppressed.

"Evidence put forward by the minority has not been rebutted by the defendants because they did not call witnesses. This is the same approach taken previously by the defendants, and the court of appeal had already disagreed with that approach," he said.

In 2017, Justice Che Mohd Ruzima Ghazali had dismissed the case with costs, stating that the plaintiffs should have brought the summons against the gold investment scheme company for any breach, and not against the defendants. 

The plaintiffs then made an appeal to the Court of Appeal last year, where a decision was made to revert the case back to the High Court here. Since the scheme was suspended in June 2009, over 6,000 investors have been trying hard to recover their money, totalling RM411mil.

The defendants are company directors Chong Yuk Ming and Chang Kuei Geh, and majority shareholders Goon Koon Lee and Ho Chee Cheong.

In June 2016, the investors had a glimmer of hope when the High Court here granted leave to the minority shareholders to sue the four defendants. This enabled the plaintiffs to file summonses on behalf of the group against the directors and majority shareholders.

Lawyers R. Raj Shankar and K. Kumaran represented the defendants. 

A.Gopalan Nair, a spokesman for the plaintiffs, said they would appeal the case, and fight until the end. He said in their 10-year struggle, many of them had lost all their savings and hard earned money.

"Where is justice for us? We will continue to ensure we get our money back using all channels within the law. The government should set up a Consumer Protection Act to ensure people are protected from such scandals," he added.

Robots Replacing Bankers

Technological efficiencies will result in the biggest reduction in headcount across the U.S. banking industry in its history, with an estimated 200,000 job cuts over the next decade, Wells Fargo & Co. said in a report. The $150 billion annually that the country’s finance firms are spending on tech -- more than any other industry -- will lead to lower costs, with employee compensation accounting for half of all bank expenses.

 Back office, bank branch, call center and corporate employees are being cut by about a fifth to a third, with jobs related to tech, sales, advising and consulting less affected, according to the study.

"It will be a dramatic change in contact centers, and these are both internal and external, ” Michael Tang, a Deloitte partner who leads the consulting firm’s global financial-services innovation practice, said in an interview in the Wells Fargo report. "We’re already seeing signs of it with chatbots, and some people don’t even know that they’re chatting with an A.I. engine because they’re just answering questions.”

Wells Fargo’s Mayo joins bank executives, consulting firms and others in predicting huge cuts to the banking workforce amid the push toward automation. McKinsey & Co. said in May that it expects the headcount for front-office workers -- the bankers and traders historically seen as among finance firms’ most valuable assets -- to drop by almost a third with the rise of robots.

Amgeneral & Allianz Merger - Ended

AMMB Holdings Bhd’s (AmBank Group) 51%-owned subsidiary AmGeneral Insurance Bhd and Allianz Malaysia Bhd may have ended their merger talks, say people familiar with the matter.

“One of the reasons is that Bank Negara Malaysia believes the two insurers combined would be too big for the market, especially when they both command a large share of the same market segment,” says a source.

When asked whether the talks were called off and if the banking group was in discussions with others on a merger and acquisition (M&A) of its general insurance business, an AmBank Group spokesperson replies in an email: “We are constantly reviewing our businesses in line with our aim to optimise growth.

“That being said, AmBank Group is governed by exacting disclosure requirements. Should there be any pertinent announcements to be made, we will do so according to the disclosure requirements.”

News of merger talks between the two companies broke in January this year after Bloomberg reported that AmGeneral Insurance’s owners and Allianz had applied to Bank Negara to formally proceed with negotiations on the terms of a transaction.

Bankers say AmGeneral Insurance remains an attractive asset for AmBank Group to unlock, should talks with Allianz be called off. This is because it is the country’s second largest automotive insurer with a market share of 15%. The general insurance business contributed RM101 million to AmBank Group’s net profit in its financial year ended March 31, 2019 (FY2019).

Nevertheless, industry observers and analysts expect increased interest in M&A in the insurance sector. “More companies and banks seem to be exploring M&A in the industry, driven by the ‘more open’ stance on foreign shareholding in insurance companies today, depending on the structure proposed by the parties. A merger between the insurance arm of RHB Bank Bhd and Tokio Marine Insurans (M) Bhd, for example, would be an interesting test case,” says a foreign banker who declined to be named.

On July 31, RHB Bank announced that Bank Negara had granted it a six-month window to negotiate the proposed sale of up to 94.7% of its general insurance business to Tokio Marine. This marked the first significant formal negotiation to acquire a local insurer in the country since the government announced its intention to enforce a 70% foreign ownership cap last year.

It was recently reported that French insurer AXA SA and Affin Bank Bhd are exploring options, including a potential sale of their life and general insurance business in Malaysia that could fetch about US$650 million.

“Unlocking the insurance asset that is parked in a bank could elevate the additional capital requirement on the bank for holding a financial institution asset. And, of course, should there be a sale, shareholders can expect a dividend payment from the proceeds,” says an analyst.

As at Sept 20, AmBank Group had a trailing 12-month dividend yield of 4.84%, which is considered high compared with those of its peers. According to Absolutely Stocks data, it has the fourth highest dividend yield among the listed banks, after Malayan Banking Bhd (9.35%), Malaysia Building Society Bhd (5.59%) and Alliance Bank Malaysia Bhd (5.47%).

In FY2019, AmBank Group recorded a dividend payout ratio of 40% and had a dividend per share of 20 sen compared with 15 sen in FY2018. Including its DPS and growth in its share price between FY2018 and FY2019, AmBank Group’s total shareholders’ return was 21.1%.

While it is unclear how much the sale of AmGeneral Insurance would generate for the banking group, news reports earlier this year noted that the local insurer could be valued at up to US$800 million (about RM3.29 billion).

The insurer reported a lower net profit of RM220 million in FY2019 — down from RM255 million in the previous year — impacted by lower trading and investment income as well as higher expenses. Nevertheless, its return on equity was 12.8%.

One of the largest motor and general insurers in the country, AmGeneral Insurance has more than two million customers and four million policies. It achieved higher gross written premiums of RM1.53 billion in FY2019, up from RM1.47 billion in FY2018.

Its products are distributed under two established brands — Kurnia and AmAssurance.

AmGeneral Insurance has a network of 33 Kurnia and AmAssurance counters and branches, as well as more than 6,500 agents and dealers. Its products are also sold at AmBank Group’s 170 nationwide branches.

Last year, it was the country’s second largest insurer with a gross market share of 14.6%. It is also the third largest general insurer by gross written premium with a market share of 8.6%.

AmBank Group also has a life insurance business operating under AmMetLife Insurance Bhd, which is a joint venture between the local banking group and MetLife International Holdings Inc. Compared with the general insurance business, the life insurance business is a small contributor to the group.

AmMetLife serves a million policyholders in Malaysia and returned to the black in FY2019, registering a net profit of RM35 million compared with a net loss of RM1.5 million in FY2018.

Prudential Fined £24 Million For Serious Breaches

Prudential has been fined nearly £24m for “serious breaches” after failing to advise customers they might get a better deal if they shopped around for annuities and incentivising staff with spa breaks and weekends away.

The Financial Conduct Authority, the City watchdog, said the failures caused harm to customers affected by the breaches between July 2008 and September 2017.

Prudential apologised to customers and said it hoped to pay compensation by the end of October to most of the 35,000 people it estimates are affected. So far, the company has paid out £110m to 17,240 customers.

As well as failing to ensure customers were consistently informed they might get a better deal if they shopped around, the FCA said Prudential had also failed to properly monitor customer calls and handed out incentives to staff that meant they might “put their own financial interests ahead of ensuring fair customer outcomes”.

Call handlers were given sales-linked incentives, offering them the possibility of earning an additional 37% on top of their base salary and winning prizes such as spa breaks or weekend holidays.

The watchdog said the £23.88m penalty would have been £34.1m if Prudential had not accepted the findings.

Mark Steward, the FCA executive director of enforcement and market oversight, said: “Prudential failed to treat some of its customers, who could have secured a better deal on the open market, fairly.

“These are very serious breaches that caused harm to those customers. Prudential is now rightly focused on redress and today’s financial penalty reinforces the cardinal obligation of fairness that firms owe to customers.”

Prudential said: “We are deeply sorry for the historic failings in our non-advised annuity business and any detriment this has caused our customers. We are working hard to put this right and are on schedule to offer redress to the vast majority of affected customers by the end of October this year.

“Our systems and controls have been significantly strengthened in the past two years through a substantial investment in our business.”

An annuity is a retirement income product that can be bought with a customer’s pension pot and pays them a regular income in return. Prudential stopped selling annuities directly to customers in February 2017.

Forever 21 - Nothing Is Forever

Fashion retailer Forever 21 Inc filed for Chapter 11 bankruptcy on Sunday as it joined a growing list of brick-and-mortar players who have succumbed to the onslaught of e-commerce.

Since the start of 2017, more than 20 US retailers, including Sears Holdings Corp and Toys ‘R’ Us, have filed for bankruptcy as more customers shift to online retailers such as Amazon Inc.

The company lists both assets and liabilities in the range of US$1 billion to US$10 billion (RM4.18 billion to RM41.8 billion), according to the court filing in the US Bankruptcy Court for the District of Delaware.

The retailer said it received US$275 million in financing from its existing lenders with JPMorgan Chase Bank, NA as agent, and US$75 million in new capital from TPG Sixth Street Partners, and certain of its affiliated funds.

With these funds, Forever 21 said it intends to operate business as usual and will focus on the profitable core part of its operations. Meanwhile, the company plans to close most of its international locations in Asia and Europe, but will continue operations in Mexico and Latin America.

Founded in 1984, the retailer has 815 stores in 57 countries. Last week, it said it would exit Japan and close all 14 stores at the end of October. Kirkland & Ellis LLP was serving as the company’s legal adviser, Alvarez & Marsal advised on restructuring, and Lazard acted as its investment banker. 

AIA Can Withstand Hong Kong Visitor Slumped

Turbulent times should mean good business for insurers as people try to protect themselves against the hazards of an uncertain world. Hong Kong’s summer of unrest has proved anything but happy for shares of AIA Group Ltd., the city’s biggest seller of policies. The company may prove more resilient than investors are giving it credit for.

AIA has slumped more than 16% from its July 19 peak, among the worst performers on Hong Kong’s Hang Seng Index in that period. The insurer has the third-highest weighting in the benchmark after HSBC Holdings Plc and Tencent Holdings Ltd., which have both lost less than 9% over the same time frame. AIA’s steepening decline is unusual for a stock that has mostly seen steady gains since it was spun out of American International Group Inc. after the financial crisis in 2010. 

Covered Position - AIA makes up 9.8% of the Hang Seng Index, just behind HSBC and Tencent . Blame the Hong Kong protests. Anti-government demonstrations have led to a precipitous fall in mainland Chinese visitors to the semi-autonomous city. These tourists are an important source of business for Hong Kong insurers, whose dollar-based products offer a hedge against the falling Yuan and a route outside China’s restrictive capital controls. Chinese tour groups to Hong Kong for the Golden Week holiday starting Oct. 1 are set to to plunge 86% from a year earlier.  

Policies sold to mainland visitors amounted for 26% of total new premiums received from individuals in the first six months of 2019, according to Hong Kong’s Insurance Authority. While AIA sells insurance across Asia, Hong Kong contributed 40% of its new business value in the first half. Of this, mainland Chinese visitors accounted for 20%.

A Large Slice - Hong Kong made up 40% of AIA's new business value in the first half of the year. The physical presence of customers in Hong Kong is important because, unlike most financial assets, the city’s regulators require insurance to be sold face-to-face, at least to new clients. AIA, Prudential Plc and China Taiping Insurance Holdings Co., a state-controlled company based in Shanghai, are among the most reliant on mainland visitors.

There’s more to AIA’s China exposure than sales made in Hong Kong, though. The company’s new business value in China surged 26% in the first half to account for 29% of AIA’s total. Demand for insurance is surging in the mainland as incomes rise while health and retirement systems remain under-developed.

Until recently, AIA had failed to make much headway in a market that’s dominated by state behemoths such as China Life Insurance Co., despite being the only foreign insurer allowed to operate without a partner (thanks to roots that stretch back to 1919, when AIG was founded in Shanghai). That may be starting to change as the government, under pressure from slowing economic growth, opens its financial markets further to overseas companies.

This year, the government loosened regulations that restricted AIA to five geographical regions: Beijing, Shanghai, Shenzhen and the provinces of Jiangsu and Guangdong. The insurer has now moved into new provinces and started selling policies in Tianjin municipality and in the city of Shijiazhuang in Hebei province. (German insurer Allianz SE  has been given the green light to set up the first wholly foreign-owned insurance holding company in the country.) 

Large Exposure - AIA is Hong Kong's largest life insurer by in-force premiums with a 23% market share in 2018. In any event, the collapse in Chinese visitors to Hong Kong is likely to ease even if the protests continue. Investment-linked insurance products denominated in the Hong Kong dollar – which is pegged to the greenback – offer a perennial hard-currency allure for mainland individuals with few opportunities to diversify at home. Insurers in the city also sell policies denominated in the U.S. dollar itself. AIA’s new business value in Hong Kong jumped 19% in the first half.

The slide in AIA stock has taken its price to embedded value to 1.9 times, from a peak of 2.4 times at the end of June. That’s still a premium to rivals such as Ping An Insurance (Group) Co., at 1.3 times, and China Life at 0.5 times. Prudential, weighed down by its exposure to the slower-growing U.K. market, trades at 0.7 times embedded value. Still, 19 of 22 analysts tracked AIA stock a buy, with only one sell recommendation.

This slump looks to have limits.